Environmental disclosure of islamic financial institutions (if is)

Journal of Energy Technologies and Policy
www.iiste.org
ISSN 2224-3232 (Paper) ISSN 2225-0573 (Online)
Vol.3, No.11, 2013 – Special Issue for International Conference on Energy, Environment and Sustainable Economy (EESE 2013)

Environmental Disclosure of Islamic Financial Institutions (IFIs):
Preliminary Evidence from Malaysia
Faizah Darus1 Haslinda Yusoff2 Nor Khadijah Mohd Azhari3
1.2.

Accounting Research Institute & Faculty of Accountancy, Universiti Teknologi MARA, Shah Alam, Malaysia
3

Tunku Abdul Rahman College, Perak, Malaysia

* Corresponding author: Faizah Darus: faiza634@salam.uitm.edu.my
Abstract
Preservation of the natural environment is one aspect of social responsibility that is expected to be undertaken by
Islamic Financial Institutions (IFIs) consistent with the Islamic perspective of corporate social responsibility
(CSR) where human beings are regarded as ‘khalifah’ (vicegerent on earth) and are required to take care of the
natural environment entrusted to them. Using a sample of thirty-seven (37) IFIs, this paper presents preliminary
findings on the environmental disclosure of IFIs in Malaysia for the year 2010. The results gleaned from this
study revealed that environmental disclosure amongst IFIs in an emerging economy such as Malaysia is still low.
The findings from an investigation into the key areas of environmental disclosure revealed that the focus of the
IFIs in the context of environment revolves on activities toward the conservation of the environment,
environmental education and on environmental audit and independent verification of environmental information.
The implication of the findings from this study suggests that IFIs as capital providers and facilitators of industrial
activities need to embark on a more holistic and systematic way of integrating environmental policies,
procedures and processes into their overall business activities so as to improve their environmental performance
and the disclosure of environmental information.
Keywords: Environmental disclosure, corporate social responsibility, Islamic financial institution
1. Introduction
1.1 Islamic Financial Institutions (IFIs) and Environmental Preservation
The growing awareness and demands among investors to invest in Shariah (Islamic law) compliant products on
a global scale has created a flourishing Islamic capital market globally. Malaysia’s participation towards the
development of an Islamic capital market began in the 90s with the introduction of Islamic banks. By the end of
July 2011, Malaysia’s Islamic banking asset stood at RM389.3 billion or 21% of the total banking sector in the
country with takaful (Islamic insurance) asset contributing to 8.7% of the total asset of the insurance industry. In
addition, about 62.7% of the global outstanding Islamic sukuk (loan) issuance also originated from Malaysia
(source Bloomberg, 2011). By viture of being Shariah compliant, these Islamic Financial institutions (IFIs) are
expected to be socially responsible in order to fulfill the collective religious obligation and to be exemplary
figures to society (Farook, 2007).
Corporate Social Responsibility (CSR) from a conventional perspective has been defined from various
perspectives. Bursa Malaysia for example defined CSR as “an open and transparent business practices that are
based on ethical values and respects for the community, employees, the environment, shareholders and other
stakeholders”. From the Islamic perspective, CSR revolves on the concept of ultimate accountability to God
where human beings are regarded as ‘khalifah’ (vicegerent on earth) and are expected to relate with other
humans in order to take care of the natural environment entrusted to them (see for example Farook, 2007; Hassan
and Harahap, 2010; Maali, Casson and Napier, 2006; Haniffa and Hudaib, 2007; Aribi and Gao, 2010; Farook,
Hassan and Lanis, 2011; Abbasi, Kausar, Ashiq, Inam, Nasar and Amjad, 2012). There have been numerous
studies to measure the extent of CSR disclosure among IFIs in Malaysia (see for example Maali et al, 2006;
Hassan and Harahap, 2010; Aribi and Gao, 2010; Farook et al., 2011) however, not many studies have focused
on the environmental aspect of CSR disclosure among IFIs. Due to the paucity of empirical research in this area,
this study specifically focuses on the environmental disclosure of IFIs in their efforts to preserve the natural
environment. The aim of this study is to examine the environmental disclosure of IFIs in Malaysia for the year
2010 in order to gain insights on their involvement in the preservation of the natural environment.
The remainder of this paper is organised as follows. The next section provides the literature review while section
(2) elaborates on the research methodology employed for this study. Section (3) presents the results and
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discussions on environmental disclosure of IFIs in Malaysia. The final section (4) highlights the concluding
comments.
1.2 Literature Review
In Malaysia, the establishment of Islamic finance traces its root back to the 1960s where initiatives and efforts
were directed towards the establishment of Islamic banks in Malaysia. The IFIs in Malaysia is regulated by Bank
Negara Malaysia (the Central Bank of Malaysia). Bank Negara Malaysia has also set-up a National Shariah
Advisory Council on Islamic Banking and Takaful to support the Islamic finance infrastructure and to harmonise
the IFIs in Malaysia. This council is the highest authority on Islamic Banking and Takaful in Malaysia and it
assists in providing consistency and uniformity on Shariah rules issued by individual Islamic banks. In line with
the government’s aspiration to position Malaysia as an Islamic financial hub, Malaysia has also opened its door
to allow foreign Islamic banks to establish their businesses in Malaysia. Currently, Malaysia’s banking sector
offers a variety of Islamic financial products and services.
Consistent with the Islamic principles where Islamic organisations are expected to carry out their business
activities and to participate in societal development, this study aims to explore the environmental practices of
IFIs in Malaysia. Empirical evidence concerning environmental practices of IFIs is still lacking. In fact, the
overall CSR disclosure of organizations in developing Asian countries such as Malaysia are said to have lagged
behind in terms of accountability and transparency reporting, particularly relating to the quality of CSR
information disclosed (Loftus & Purcell, 2008). Therefore, in an effort to promote CSR disclosure among
companies in Malaysia, in September 2006, Bursa Malaysia launched a CSR framework covering four key
dimensions of CSR relating to workplace, community, marketplace and the environment. The Bursa Malaysia
framework is however applicable only to public-listed companies in Malaysia including financial institutions that
is public-listed. There is an increasing pressure globally for financial institutions to embark on green banking
activities including in the offering of their products and services. This is despite the fact that the operation of the
banking sector does not directly construct a negative impact on the environment. However, it is argued that the
effects of their services such as their lending decisions may implicitly affect the environment and the local
communities (Thompson & Cowton, 2004).
In fact, Strandberg (2005), describe the finance industry as:
“… the key to sustainability, as they raise, allocate and price capital and provide risk coverage, influencing
access to financing and risk protection, and determining which government, business or individual activities get
financed or protected against risks.”
(Strandberg, 2005, p. 5)
The philosophy of Islamic CSR is different from conventional CSR where CSR in Islam focused not only on the
economic perspective but also incorporates the spiritual values as derived from the Holy Quran and the Sunnah.
Siwar and Hossain (2009) stated that Islam is not just a religion but as a complete way of life. The Quran and
Sunnah govern the way on how Muslims should live their lives and performed their activities. The three major
fundamental principles where mankind plays a vicegerent role on earth, their divine accountability to God and
the obligation to enjoin good deeds and forbid evils forms the premise of Islamic CSR (Farook, 2007). In this
context, Muwazir et al., (2006) emphasized that as a vicegerent, leaders in Islamic business organizations are
required to practice CSR essentially from the principle of Tauhid. In addition, Kamla, Gallhofer and Haslam
(2006) stated that as a vicegerent, mankind needs to take care of the earth and the environment. Preservation of
the natural environment is one aspect of social responsibility that is contained in the verses of the Quran.
Aribi and Gao (2010) conducted a comparative study between CSR disclosure of IFIs and conventional financial
institutions in Malaysia. The results of their study revealed that the level of CSR disclosure among IFIs was
greater than for the conventional financial institutions. Yahya et al. (2005) on the other hand, examined the level
of CSR disclosure of Shariah approved companies in Malaysia and found that the companies disclosed about 40
percent of their social acitivies in their annual reports.These prior empirical research regarding CSR for IFIs
were predominantly based on CSR disclosure. This study however, takes a different approach by providing a
preliminary investigation on the environmental practices of IFIs.
2. Method
2.1 Sample
Islamic banking business is defined as a banking business whose aims and operations do not involve any element
which is not approved by the religion of Islam (Section 2, Islamic Banking Act, 1983). This study has identified
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fifty-one (51) IFIs in Malaysia. Fourteen (14) of the IFIs were excluded from the sample due to various reasons
such as unavailability of annual reports or incomplete CSR information in the annual reports resulting in a
sample of thirty seven (37) IFIs. A content analysis of the annual and sustainability reports for the year 2010
were undertaken to examine the environmental disclosure of IFIs in Malaysia. This sample was then sub-divided
into four (4) categories in accordance to the Act regulating the IFIs, namely; IFIs regulated by the Islamic
Banking Act 1983 (IBA), takaful (Islamic insurance) and retakaful (Islamic reinsurance) operator registered
under Takaful Act 1984 (TA), financial institutions licensed under the Banking and Financial Institutions Act
1989 (BAFIA) that participate in Islamic Banking Scheme and lastly development financial institutions
prescribed under the Development Financial Institutions Act 2002 (DFIA) that participate in the Islamic Banking
Scheme. Table 1 presents the sample for the study sub-divided according to the Regulatory Acts.
Table 1. Sample of Islamic Financial Institutions
Regulatory Acts

Number of IFIs

Islamic Banking Act (IBA)

17

Takaful Act (TA)

7

Banking and Financial Institutions Act (BAFIA)

7

Development Financial Institutions Act (DFIA)

6

Total

37

2.2 Key Areas for the Environmental Dimension
The environmental disclosure investigated was sub-divided into seven (7) key areas. The nature of disclosure for
each key area can either be in the form of word(s), sentence(s), picture(s) or graphic(s). This study did not
quantify the number of times of occurrences for each disclosed items in any single annual or sustainability report
of the companies. The following environmental disclosure index indicates the score for the disclosure of
environmental information for a company j, where N is the maximum number of relevant items a company may
disclose and di is equal to 1 if the item is disclosed and 0 if otherwise, based on the seven (7) key areas namely;
Conservation of Environment; Protection of Endangered Wildlife, Mitigation of Environmental Pollution,
Environmental Education, Environmental Products/Process, Environmental Audit/Independent Verification
Statement and Environmental Management System (EMS)/Policy. The minimum possible score is zero while the
maximum possible score is 7. Table 2 presents the key areas identified under the environmental dimension.

Σ
mj

dj
N

i=1

Table 2. Environmental Dimension based on Key Areas
ENVIRONMENTAL DIMENSION
Key Areas

Conservation of Environment
Protection of Endangered Wildlife
Mitigation of Environmental Pollution
Environmental Education
Environmental Products/Process
Environmental Audit/ Independent Verification Statement
Environmental Management System(EMS)/Policy

3. Results and Discussion
Table 3 presents the minimum, maximum and the mean scores for the environmental information disclosed by
the IFIs for the year 2010. The results show a mean score 0.46 suggesting that the disclosure of environmental
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information is still generally low as the mean score is less than 50% of the total possible maximum score.
Table 3. Mean Score for Environmental Disclosure
N
Environmental Disclosure

Minimum

Maximum

Mean

Std Deviation

37

0

1

0.46

0.505

The environmental score of the IFIs were then sub-divided according to the different categories of IFIs in
accordance to the Regulatory Acts. Figure 1 presents the mean score for the environmental disclosure subdivided by categories.
.

Figure 1: Mean Score of Environment Disclosure Sub-divided by Categories
The results from Figure 1 show that IFIs regulated by the Islamic Banking Act, 1983(IBA) have the highest
mean score (4.88), followed by IFIs regulated by the Banking and Financial Institution Act, 1989 (mean score of
4.14) and IFIs regulated by the Takaful Act, 1984 (TA) (mean score of 3.57). The lowest environmental
disclosure was related to IFIs regulated by the Development and Financial Institution Act, 2002 (DFIA) (mean
score of 3.5). The results revealed that IFIs regulated by IBA were in the fore-front in terms of environmental
disclosure. This is a positive development and reflects the consciousness of IFIs in this category in terms of their
responsibility towards the environment. This finding is consistent with the concept of CSR from an Islamic
perspective where managers, being vicegerent of God on earth are expected to take care of the natural
environment entrusted to them. The low scores for the environmental disclosure for IFIs regulated by DFIA
could be due to the fact that these IFIs were focusing more on their core business as they were established to
develop and promote key strategic sectors of the economy resulting in them playing a less active role in
environmental activities. Figure 2 presents the mean score for the environmental disclosure segregated by key
areas.

Figure 2: Mean Score of Environmental Disclosure by Key Areas
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The results from Figure 2 revealed that Conservation of the Environment, Environmental Education and
Environmental Audit/Independent Verification Statement all attained similar scores (mean scores of 0.84) and
were ranked as the top three key areas receiving the most attention by the IFIs. The lowest mean score was
registered by the key area relating to the Protection of Endangered Wildlife (mean score 0.35). The results
suggest that most of the IFIs were involved in activites towards the conservation of the environment and are
taking measures to educate the public on the importance of preserving the environment. The IFIs also seemed to
be concerned about aspects of environmental audit and the independent verification of environmental
information. The low scores for the key area Protection of Endangered Wildlife suggests that IFIs were putting
less emphasis on efforts towards the protection of endangered wildlife which in the Malaysian environment
would relate to the protection of animals such as tigers, orang utans or turtles. Table 4 presents the mean scores
for each key area and the ranking of the key area.
Table 4. Mean Score and Ranking of Environment Disclosure by Key Areas
Ranking based on mean score
Key Areas of Environmental Disclosure
Mean

Std
Deviation

Ranking

Conservation of Environment

0.84

0.374

1

Protection of Endangered Wildlife

0.35

0.484

5

Mitigating Environmental Pollution

0.54

0.505

2

Environmental Education

0.84

0.374

1

Environmental Products/Process

0.38

0.492

4

Environmental Audit/ Independent Verification
Statement

0.84

0.374

Environmental Management System (EMS)/Policy

0.46

0.505

1
3

The key areas relating to Environmental Management System/Policy (mean score 0.46) and Environmental
Products/Process (mean score 0.38) also seemed to be receiving less attention from the IFIs in their
environmental activities. This suggests that the IFIs were not managing their environmental programs in a
holistic and comprehensive manner. This could be due to the nature of their business where IFIs may take the
stand that the banking sector activities do not directly construct a negative impact on the environment, hence it
was not necessary to have a comprehensive EMS or policy on environment. The low score for the key area on
Environmental Products/Process also indicates that the IFIs were not incorporating environmental aspects in
their product and product development processes.
4. Conclusion
This study examined the environmental disclosure of Islamic financial institutions in Malaysia for the year 2010
and presented preliminary evidence on the state of environmental disclosure of thirty seven (37) IFIs in Malaysia
gathered from a content analysis of their annual and sustainability reports. IFIs formed the primary focus of this
study as these financial institutions were established on the desire to run an economic system based on the values
and principles of Shariah and are therefore expected to have a heightened sense of social responsibility. This
study focused on the environmental disclosure of CSR since as vicegerent on earth, managers of IFIs are
expected to take care of the natural environment entrusted to them.
The evidence from the analysis of environmental disclosure reflects that the environmental disclosure amongst
IFIs is still generally low as the mean score for the disclosure is less than 50%. However, among the IFIs, the
IFIs that are being regulated by the Islamic Banking Act 1983 have the highest environmental disclosure and are
in the leading position. This is a positive development and is consistent with the Islamic principles because the
IFIs that are regulated by the Islamic Banking Act 1983 comprised of Islamic banks, (both local and foreign) that
had set up their operations in Malaysia.
The findings derived from the investigation into the key areas of environmental disclosure revealed that
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Conservation of the Environment, Environmental Education and Environment Audit/Independent Verification
Statement were the top three key areas receiving the most attention by the IFIs. This indicates that the focus of
IFIs in the context of environment revolves on activites relating towards the conservation of the environment and
environmental education. The concerned on environmental audit and independent verification of environmental
information suggests that IFIs have incentives to provide credible information to stakeholders. The low scores
for the key areas Environmental Management System/Policy and Environmental Products/Process revealed that
IFIs were not managing their environmental programs in a holistic and comprehensive manner and were not
incorporating environmental aspects in their product and product development processes. In addition, the results
revealed that the IFIs were also not participating in the protection of endangered wildlife as this key area had the
lowest mean score.
Overall, this paper contributes to a better understanding of the environmental disclosure among Islamic financial
institutions in the setting of an emerging economy such as Malaysia where organisations are still grappling with
the concept of CSR. The implication of the findings from this study suggests that IFIs as capital providers and
facilitators of industrial activities need to embark on a more holistic and systematic way of managing their
environmental affairs in accordance with Islamic principles so as to integrate environmental procedures and
processes into their overall business activities in order to improve their environmental performance and the
disclosure of environmental information.
Acknowledgements
The authors would like to express their gratitude to the Accounting Research Institute, the Ministry of Education,
Malaysia and Universiti Teknologi MARA for funding and facilitating this research project.
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